The Government Pension Investment Fund revamped its 22.1 trillion yen ($214 billion) Japanese stock portfolio, adding new managers and investment styles.
The world’s largest pension fund will reduce passive investments that track the Topix index and add the JPX-Nikkei 400 Index among new benchmarks, according to an April 4 statement. Traditional active investments will be trimmed to make room for smart-beta strategies, GPIF said. The JPX-Nikkei 400, a stock gauge that is the brainchild of the ruling Liberal Democratic Party, started in January.
“We aimed for an overhaul that would show just what kind of stock investment GPIF is targeting,” Tokihiko Shimizu, director of general of the research department at GPIF, said April 4. “We made bold changes.”
The new strategy comes amid pressure on GPIF, which has more than half its 128.6 trillion yen of assets in Japanese bonds, to achieve higher returns to cover pension payouts for an aging population. A panel handpicked by Prime Minister Shinzo Abe last year recommended that the fund move beyond passive stock investments using the Topix as a benchmark.
“GPIF is changing in several ways, or at least I sense their will to change,” said Kazuyuki Terao, Tokyo-based chief investment officer at Allianz Global Investors Japan Co. “JPX-Nikkei 400 is designed to encourage investment in stocks with high return on equity, which aims to change corporate governance using the power of the market. Plus, they’re trying to boost returns.”
GPIF selected 14 active and 10 passive investment managers, eight of which had existing mandates from the fund, according to last week’s statement. It also said it will make passive and active investments in Japanese real-estate investment trusts.
The fund will introduce a performance-based fee structure for active managers, it said. GPIF paid fees to domestic stock managers equating to 0.04 percent of the assets they oversaw in the year ended March 31, 2013.
Smart beta occupies a middle ground between passive funds and active management. Designers of the benchmarks used in the strategy build their own indexes or change existing ones, trying to boost returns by ranking companies not by price, but by measures such as volatility and dividend payments.
GPIF’s three smart-beta managers will include Goldman Sachs Asset Management Co., according to last week’s announcement.
Goldman Sachs Asset’s benchmark is the S&P GIVI Japan index, which weights stocks based on their “intrinsic value” calculated by assessing the value of each company’s assets and their forecast earnings growth, according to the website of S&P Dow Jones Indices LLC, which created the gauge.
GPIF said it named Diam Co., Sumitomo Mitsui Trust Bank Ltd. and Mitsubishi UFJ Trust & Banking Corp. to oversee passive JPX-Nikkei 400 investments, with BlackRock Japan Co. using the MSCI Japan Index and Mizuho Trust & Banking Co. investing based on the Russell Nomura Prime Index.
The JPX-Nikkei 400 slid 6.3 percent this year through last week, compared with a 6.6 percent decline for the 1,780 member Topix and 7.5 percent for the Nikkei 225 Stock Average.
“All shares were generally bought together in the past, but that’s going to change, with some being chosen and others not,” Allianz’s Terao said. “The government is trying to use that to improve corporate governance and profitability. I hope that’ll help improve Japan’s financial markets.”